a philosopher's sketchbook

Risk Management

I’ve found an interesting writer, named Nassim Taleb. Many folks have probably already heard of this guy. In an intellectual climate that seems to have long given up on polymaths and generalists, he’s somehow emerged as exactly that — a polymath and a generalist.

His views on risk management are particularly interesting because they’re unusual and antithetical to the current standards in this field. Taleb believes that risk cannot be accurately predicted, and the models by which people try to predict risk are faulty. To distill his analysis, there’s a reason that finance companies say, “Past performance does not guarantee future results”. And yet, risk managers continue to analyze past performance for a way to mitigate future risks, thereby attempting to guarantee future results. According to Taleb, we cannot predict when risks will strike our carefully constructed systems, and we also cannot predict the size of the risk that will next wash over us.

The response to this wrong-headed attempt at risk management is to control the details we can. We should give up our standard deviations, and focus on building systems that can withstand, and even prosper from, all the risks we’re likely to encounter. Taleb calls these systems “antifragile” systems: they are the opposite of fragile systems that are prone to destruction when a particular degree of risk strikes. By contrast, antifragile systems are not destroyed: like living organisms, they can survive many types of use and abuse. Some types of use and abuse are even beneficial to antifragile systems, e.g. exercise, or exposure to low levels of a disease or poison.

This idea can be successfully applied to many parts of life: finance, health, urban planning, etc. Of course, this contrarian view of risk management still requires risk analysis, in order to determine the types of risk that a system ought to be antifragile to, versus simply resistant to, since it is not possible or efficient to be antifragile to every risk: this would take too much time and too many resources to achieve. However, his point that we can apply the results of our risk analysis to building a better boat, rather than trying to predict and avoid the hurricane bearing down on our currently unsuitable boat is a useful observation: one that I look forward to reading more about, and trying to apply to my life.

Have you read any of Taleb’s other books? Share your thoughts about Taleb’s idea in the comments.